Insider Trading
Roughly speaking, insider trading involves use of nonpublic information by any person "having a relationship officer, attorney giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone. By use of information to trade or tip other who trade, such person makes a gian, or in the case of trading on negative news, foregoes a loss by remaining silent when there is a duty to speak. Insider trading cases are a subset of a set of Rule 10b-5 cases, namely cases of silence, rather than misstatement, by a person in a fiduciary or similar relationship. Rule 10b-5 and its opaque provisions are the foundation stones for the entire insider trading edifice, at least under federal law. That set is a smallish part of the universe of potential Rule 10b-5 cases, which includes affirmative misstatements, half-truths, or omissions by any person ( and not merely fiduciaries) in oral statements, informal writings, formal writings, and legal documents including merger documents, prospectuses, other SEC filiigns, and so on. Different Scenarios Different scenarios - there are four ways to define insiders or their equivalents upon whom the "disclose or abstain" prohibtion is visited. Those four ways are: *1) A classical insider or equivalent who by virtue of a or similar relationship has access to nonpublic information and has a duty to disclose arising from a relationship of trust and confidence between parties or a securities transaction (for example, the corporate director in Matter of Cady, Roberts & Co.) *2) A temporary insider, or quasi-insider: an attorney, accountant, banker, consultant or other person who temporarily becomes a fiduciary of the corporation *3) A tipper or tipee who meets the receipt of a benefit and tipper breach of fiduciary duty test for tipper-tippee liability (Dirks) *4) Someone who steals (or converts) the infomration in violation of a duty owed to the owner of the information (a misappropriator), or their tippee ("fraud on the source"). The Nature of the Insider Trading Prohibition The prohibition visted upon the insider is "disclose or abstain.' Because the prerogative to disclose usually is the corporation's, and not the insider's, the effective prohibition because to "abstain" from trading, or from tipping others to trade. In smaller corporation, of course, the insider may be an effective alter ego of the corproation adn may be able to disclose. It will also be easy to do if the transaction takes place in the face-to-face setting. The insider merely discloses the nonpublic information to the person with whom he is trading. In anonymous markets, including even a local over-the counter market, although conceivably the insider may be able to disclose, it may not be easy to do so. It is not sufficient for the insider to post a notice on a telephone pole, because the prohibition visted upon the insider lasts until the information is not only disclosed, but has been effectively disseminated to the market. The insider who has the prerogative to disclose nonetheless may be able to persuade the local newspaper editor to publish teh insider's press relaes or otehr notice. In that case, the insider's duty to abstain may persist for some time. Who is an insider A traditional insider is a person who: · because of a fiduciary or similar relation o In Chiarella v. United States , the Supreme Court reexamined the Cady principle which defined who is an insider by use only of an access test (anyone, classical insider or not, who had access to material nonpublic investment information, became an insider). In Chiarella, instead of placing the emphasis on "access," the court shifted back to the full wording: "the existence of a relationship giving access to nonpublic information." He found that the "duty to disclose arises when on party has information 'that the other party is entitled to know because of a fiduciary or similar relation of trust and confidence between them." The requirement of a fiduciary relationship relates to the common law notion that wihtout it there is not duty to disclose. Throughout the opinion, it was emphasized that the duty owed, if it is owed at all, is owed to the other party to the transaction (that is, the purchaser or sellers of the shares). The opinion thus build to a conclusion that rejected the notion that Rule 10b-5 imposed a duty to the market as a whole. · afforded access to nonpublic investment information from the corporation. o In the beginning, In re Cady, Roberts & Co. was a starting point for who an insider is. Cady Roberts extended the disclosure-or-abstain obligation beyond classical insiders by bestowing insider status on anyone who had "access" to nonpublic information, the "obligation dislcose or abstain rests on ... the existence of a relationship giving access, director or indirectly, to information intended to be available only for a corporate purpose and not for the person benefit of anyone ..." the concept of who was subject to the disclose-or-abstain obligation who is an insider-seemingly became flexible and open-ended The paradigmatic insider is the senior corporate official or director in a corporation, although professionals such as attorneys, accountants, and investment or commerical bankers may also become insiders, or temporary insiders, when the learn of nonpublic infroamtion during the course of performing services for the corporation. Tipper-Tippee Liability An insider who passes information to another person knowing that the other person will trade is a tipper. Whether she trades or not, a tipper has the same liabiltiy as an insider who actually trades. The recipicent of the information is a tippee, and also have insider trading liability, but only if she trades. If the tippee in turn tips another individual, she also becomes a tipper because once she received the information from the tipper, the tippee now also owes a fiduciary duty to the shareholders. Her recipient is a sub-tippee or remote tippee. One can envision a chain of remoter tipper-tippees, although at some poitn an arugemtn may be made that the information is no logner nonpublic information. In Dirks v. SEC, the Supreme Court found the tippee's oblgation to be derivative of the tipper insider's obligation ("there must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain." THe court thus expanded upon Chiarella v. nited States and its requirement of a fiducairy relationship but in the context of tipper-tippee liability. NOt any tipper-tippee access to an insider source will be sufficient to ground liability. The court devised a more limited test of tippee liability. It first became "necessary to determine whether the insider's 'tip' constituted a breach of the insider's fiduciary duty." That, in turn depends upon "whether the insider personally will beenfit, directly or indirectly from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders."